Kat has a Master of Science in Organizational Leadership and Management and teaches Business courses.

There are several ways in which a contract can be terminated, including performance, impossibility of performance and breach of contract. Other ways to end a contractual agreement are a bit more complicated and involve a prior commitment on the part of one or both of the parties or even revocation.

Simplest Ways to Terminate a Contract

When two parties enter into a contract, they are entering into a legally binding agreement that may be very difficult to get out of. They cannot simply change their minds and walk away. One of the easiest and most desired ways to terminate a contract is performance. Simply put, when both parties fulfill their promises set out in the contract, the parties have done what they said they would do and the contract ends.

For example, John, a homeowner, contracts Pete to paint his house for the sum of $100. Pete arrives on time, paints the house to John's satisfaction and payment is rendered. Done!

Sometimes, it is just difficult to carry out the agreement, causing one or both of the parties to bail on their commitment. The impossibility of performance means one or more parties to the contract just cannot fulfill the promises made to the other party.

With all good intentions, Pete loads his truck with ladders, brushes and a well-balanced lunch. On the way to grab his paint cans, Pete trips over a pebble and breaks his leg. Pete cannot fulfill the promises made in the contract. This impossibility of performance gives John the right to terminate the contract and find an able-bodied painter to take on the task. To evaluate impossibility of performance, the court looks at the conditions of performance based on the circumstances to determine whether performance cannot be met.

There are three steps:

Did a contingency or something unexpected occur?

Was the unexpected event intentional?

Is it impossible to perform because of the unexpected event?

In other words, as long as Pete can prove he broke his leg and that neither party did anything intentional to cause the injury, Pete would be off the hook because he cannot paint a house in his condition.

Slightly More Complicated Ways to Terminate a Contract

A prior agreement can also be a cause to terminate a contract. This allows one party to terminate a contract if prior plans cause the party to become unable to fulfill the promises and must be written into the contract. Perhaps John has a job that takes him away from his home for extended periods of time with little to no notice. John should include a clause in the contract that allows for termination, should he be called away on a special mission. If John is called away, he may terminate the contract with Pete and suffer no consequences.

To avoid a situation like this, many contracts, especially employment contracts, have an entire agreement clause that states either party cannot argue that there were additional or alternate terms to the contract based on a previous agreement. This means that regardless of anything that may have been part of a past agreement, the new agreement stands.

In a prior agreement clause, John could state that if he were to be called away for business when Pete was slated to start painting the house, the contract would be void. In an entire agreement clause, Pete could state that regardless of any prior agreements made regarding conversations about John's possible travel schedule, the terms of the contract to paint the house on a particular day and time stand.

Now, if neither the prior agreement clause nor the entire agreement clause were written into the contract, and John took flight to a far-away place without telling Pete, this could cause a world of trouble for John. John would be in a breach of contract for not fulfilling the promises made to the other party in the agreement, and this could be a cause for Pete to take legal action against him. There are two types of contract breaches: a material breach and a non-material breach. In a material breach, one of the parties violated the terms of the contract in a significant way that affects the outcome of the promises.

If John requested that Pete purchase a specific color of house paint, like cotton candy pink, but Pete, instead, found a better deal on candy apple red and proceeded to mark the shingles with this color, John would have a cause to terminate the contract. He would also have another claim against Pete, and that may be to have the house restored to its original color.

A non-material breach occurs when one of the parties violates the terms of a contract in a minor way. The contract may state that Pete will paint the shingles first and then the trim. Pete may decide that he wants to paint the trim first and then the shingles. As long as the final outcome is a neatly painted house, and there was no damage or injury to the other party as a result, the contract probably cannot be voided.

Suppose Pete is not really a professional painter, but represented himself as one. John may have found this out through a background check or a popular review website. John may rescind, or revoke, the contract because one party misrepresented themselves.

There are other reasons a contract may go into rescission, like:

Both parties mutually consent or agree that the contract should be terminated.

There was a unilateral mistake in the contract terms, and one party may unfairly take advantage of the other.

If one party has been coerced by fraud or deception to enter into a contract.

Terminating a contract can be tricky. The terminating party always runs the risk of having legal action taken against him. However, there are times when it is necessary and within the law to terminate an agreement. When entering into a contract, it is best practice to know the other party or parties, understand the promises you and the other parties are making and be diligent in investigating any risks that may present themselves during the contract terms.

Lesson Summary

To sum things up, there are several ways to terminate a contract. Some of the simplest ways to terminate are performance or impossibility of performance. Performance occurs when both parties fulfill the promises set out in the contract, and the contract ends. When an unexpected event occurs, rendering one party unable to perform, the doctrine of impossibility of performance kicks in, and means one or more parties to the contract just cannot fulfill the promises made to the other party. The next few cases for contract termination get a bit more complicated, and involve prior commitment, breach of contract and rescission.

A prior agreement allows one party to terminate a contract if an event occurs that causes the party to become unable to fulfill the promises, and this clause must be written into the contract. But to avoid this, some contracts contain an entire agreement clause, so that either party cannot argue that there were additional or alternate terms to the contract based on a previous agreement. When one party breaches a contract, it means he does not fulfill the promises made to the other party in the agreement, and this could be a cause for the other party to take legal action.

There are two types of contract breaches that can occur. A material breach means one of the parties violated the terms of the contract in a significant way that affects the outcome of the promises. A non-material breach is less serious and occurs when one of the parties violates the terms of the contract in a minor way. Terminating contracts can be risky. It's best that all parties go into the contract agreement with caution, understanding and good faith.

Summary:

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